Most often in Hong Kong, business interruption insurance is the expression used as a title in the business insurance package for the small and medium size companies. As a generic term, the business interruption insurance has several meaning and definition. What does business interruption insurance cover in Hong Kong? What are the different realities under the business interruption section?
This article will help you understand better what is insured and what is not insured under the business interruption section of your business insurance package.
1 – What is business interruption insurance?
Business interruption insurance (BI) also known as consequential loss, loss of profits insurance or additional expenditure insurance provides cover for the financial losses due to an interruption to a business caused by material damage to your physical assets or to the premises in which you operate.
It is important to understand that business interruption will be triggered only due to material damage. As a consequence, business interruption insurance does not work for interruption due to non-material damage such as pandemic.
Business interruption insurance covers several different meaning. The 3 main type of business interruption are in my opinion the following:
- Loss of gross profit insurance
- Additional expenditure
- Loss of rent insurance
2 – What is the loss of gross profit insurance?
Loss of gross profit insurance should be the most common choice for businesses in Hong Kong. This type of business interruption covers the loss of net profit and the standing charges that remain to be paid even though your company is not operating.
The standing charges or the fixed costs are the costs that do not change with an increase or a decrease in the amount of goods or services produced or sold. To be simple, even if your business is closed, you still must pay them. As instance,
- insurance premium
- Interest expenses
- Lease payments
- Mortgage payments
- Pension payments
The main goal of the loss of gross profit insurance is to set the company back into the same financial situation than the one it would have known if the loss would not have happened. The loss of gross profit insurance should be the most common choice of business interruption cover for businesses. Indeed, after a serious event as fire or natural catastrophe or cyber-attack, the chance of survival of the business without loss of gross profit insurance is somewhere closed to zero.
3 – What is the additional expenditure insurance?
In Hong Kong, the most common choice of business interruption insurance for small and medium size business is the additional expenditure extension often included in the business package insurance for free.
Additional expenditure insurance is a cover whereby the insurer will pay for necessarily, reasonably, and actually incurred expenses in order to restore the normal conduct of your business.
We could call such expenses as non-ordinary expenses that a business will have to pay after a major loss. It could include removal expenses, overtime payment, salary to additional staff, cleaning expenses and in general any kind of expenses that will maintain the business and minimize the reduction in turnover that will occur after a disruptive event.
For a business with simple needs such as an office, additional expenditure extension is an appropriate cover and is usually given for free by the insurance companies in Hong Kong. The limit insured could go from 500,000 HKD to 5,000,000 HKD
However, if you are a manufacturer, a retailer or if your business requires some specific equipment, additional expenditure cover only is not sufficient or appropriate. The loss of gross profit insurance is a more appropriate cover.
4 – What is the loss of rent insurance?
If one of the insured events listed in the property section of your insurance contract cause a serious damage to your building so that you will not be able to rent it out, loss of rent insurance could support you recovering the rent or the fees that you will not be able to invoice while the building is being reinstated.
When you are a landlord renting a commercial center or operating a storage facility, loss of rent insurance is an appropriate insurance to help your business mitigating the consequences of a serious loss.
To be noticed that loss of rent insurance is not an insurance to cover you in case your tenants could not pay the rent for business or economic reason.
Still having question about what does business interruption insurance cover in Hong Kong
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